US Federal Reserve policy review to cement hawkish shift

The Federal Reserve’s policy strategy review is likely to codify what officials are already doing in practice – regular inflation targeting. While this would reinforce the central bank’s inflation-fighting credibility, there is a risk the Fed misses the opportunity for a more ambitious overhaul to improve future policymaking.

What you will learn:

• We expect the Fed to scrap flexible average inflation targeting and its shortfalls-only approach to employment. Shifting to more symmetrical goals would signal a hawkish shift and refocus the central bank on its core mandates of maximum employment and low, stable inflation.
• A big emphasis of the review is to make policy resilient to greater uncertainty, including ambiguity regarding the neutral level of interest rates. This approach would place less weight on economic models and more on incoming data and the evolving risks around the baseline.
• We think the moment calls for a greater use of scenario analysis and stress testing of the economy to communicate risks and the Fed’s reaction function more effectively.

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